Introduction
The introduction of stakeholder theory as a basis for the development of Corporate Governance in the 21st century has been most effectively seen in the commitment to the sustainable economic development of employees, their families and the local community that they serve. The improvement of “society at large” it is presumed, is the basis to good business and ultimately profits (McNett, 2012). Unlike theories of agency, which propose individual decision as a model for corporate leadership, the foreign market entry of global organizations involved in trade has set the pace for increased focus on collective decision by stakeholders in response to financial control.
Stakeholders are the legal owners of corporations (i.e. shareholders) characterized by the right to enumeration in voting on matters concerning maximization of capital. Responsible for the creation and affirmation of bylaws and strategic goals in a corporation, stakeholders serve as the decision body to all major financial planning. Obligation to conduct review proceedings targeting strategic planning within the limits of law and in a manner that upholds societal expectations, confirms that “agency theory” ascribed to stakeholders is largely determined by capitalization predictors (McNett, 2012).
At the opposite end of the spectrum, weak adherence to stakeholder models of corporate ethics where inequities arise from unethical misconduct in professional practice, the emergence of risk in response to instances where an organization has not fulfilled its duty to a reasonable standard of care has created legal liabilities, a reputational disaster may ensue. Company’ financial controller activities and especially accounting practice can radically transform a corporation’s prospectus in a foreign market.
Amid the widespread popularity of corporate social responsibility (CSR) strategies in multinational corporations as measure of assurance for equity in trade, there is still a marked lack of attention to financial control. CSR is a form of collective agency; yet serves as a guiding charter in stakeholder decision. The primary instrument of accountability to those mandates, operations accounting, is especially absent from the discussion. If CSR stands as a polestar in ethical adherence to regulatory rules and mechanism for advocacy, there is still much to do in terms of agreement about what adequate and responsible financial control might be in the global business environment.
The foregoing examines the transformation of U.S. company stakeholder governance and ethical principles in correspondence to foreign market entry in China. Activity based accounting costing (ABC) influence on activity based management (ABM) is the technical measure examined in relation to principles of cost allocation for financial ‘value’ within the firm. Review of controller practices and national rules to accounting in part to foreign market entry serves as a case study in audit and in the governing ethics of corporate strategy.
Agency Theories
Scholarly and professional discussions of agency theory in relation to the governance and control of organization focuses on unethical conduct (i.e. corruption). Agency theory is apt for analysing misconduct by actors responding to financial transactions (Jeong and Weiner, 2012). Theories pointing to altruistic conduct as imperative for proper execution of financial controller functions toward the common good suggest that agency theory is limited in scope to single party decision-making by a designated officer.
The low attention to agency theory as a competent framework for evaluation of corporate governance and control aside from corruption has much to do with the fact that bribes or incentives paid to stakeholders are not usually found to be the most beneficiary, nor profitable for the group. Evidence of the widespread nature of the problem of corruption by individual agents making decisions for organizations supplies the rationale for the OECD Anti-Bribery Convention (Jeong and Weiner, 2012).
The sole national setting where agency theory is “applied” to the benefit of the group, through control of governing operations may be found in government itself, where the Head of State is a Monarchical Ruler. An example of the application of theory as a guiding principle to control of monetary accounting and fiscal policy guiding financial control can be seen in the execution of agency by the Queen of England and Britain, the Head of State presiding over the United Kingdom’s HM Treasury and legislative bodies, the House of Lords, and the British Parliament.
Stakeholder Theories
The evolution of the chief financial officer (CFO) from primarily an accounting function to one focused on financial strategy and advisory of stakeholder investors in major multinational enterprises (MNE) illustrates the import that financial control has on the governance and ethics of strategic decision (Howell, 2006). If globalization, demand for more profitable models of conducting business and technological innovation are expected to impact the role of CFO as one of strategic partner, perhaps nowhere is this more evident than in the entry of US MNE in China.
The process of globalization since the 1980s has been one of economic and financial integration of corporate interests through acquisition, merger and foreign market entry. The emergence of a global economy characterized by acquisition, merger and foreign market entry has also brought new capital controls and the elimination of former barriers to international trade (Oxelheim, 2010). Adoption of Stakeholder Theory relative to actionable strategies by shareholders is seen across the globe. The foregoing report addresses the efficacy of stakeholder theory as the primary leadership theory applied to corporate decision making.
Globalization policies targeting capital expansion have also left companies exposed to new risks. The rise of the CFO as a global partner to multinational enterprise (MNE) has been one accompanied by change in rules to practice as companies enter foreign markets. Stakeholders must stay abreast of foreign trade policies in order to make sound decisions. Preparation of an organization’s leadership often means introduction of International Financial Reporting Standards (IFRS) guidelines to accounting practice, as well as recommendations on exchange and inflation (Oxelheim, 2010).
China’s enactment of IFRS rules in 2005 has been a major step toward universal standardization of financial control, risk management and the pricing of risk by US corporations (Oxelheim, 2010). Financial analysts report that “macroeconomic effects to external stakeholders” have furthered the fostering of economic growth in China (Oxelheim, 2010). The IFRS was implemented to buffer Chinese companies and their partners against market shocks. The result is that stakeholders have had to incorporate new criteria and frameworks into strategic planning to respond adequately to those new rules.
Theoretical Comparison
In consideration of a model of theoretical preemption, one may pose the query: are Agency Theories and Stakeholder Theories exclusive each other? The answer is that they are not entirely separate, but the demand of financial control as a priority in all strategic organizational decision where publically traded companies are concerned, there is no doubt that stakeholder theory supersedes all agency theory. This argument is exhibited in the decision making protocol of companies such as Microsoft – the software giant well acknowledged for Bill Gate’s personal reputation and leadership in executive decision. The fact that Microsoft’s financial control is subject to much scrutiny by its shareholders reduces the argument that agency is the guiding force of strategic decision to null.
Clear evidence is found in the introduction of third theoretical value, in alternative approaches such as stewardship theories popularized as part of the trend in sustainably, environmentally responsible corporate programs. Stewardship activities offer a competency based scenario examination of the two theories in application (Muratbekova-Touron, 2009). While related the idealist proponents of stewardship and individualistic elements of agency are ultimately fostered according to the priorities and rules articulated by stakeholders in bottom-line driven decision.
Ethics to Market Entry: US-China
Foreign companies entering the Chinese market are faced with a number of important change management challenges in accounting. Ethics pose a serious undertaking, as multinational enterprises (MNE) and small and medium enterprises (SME) work toward solutions in financial partnership. Much has been done that evidences preference by companies and by the US and Chinese governments in respect to financial control. This supports the proposition that stakeholder theory is at work.
In 2008, the US Securities and Exchange Commission (SEC), allowed for combined audit of Chinese companies offering shares in the United States in accordance with the International Financial Reporting Standards (IFRS) board. This is a major change from the three part preparation of Chinese accounting standards (China GAAP), North American GAAP standards (US GAAP) and IFRS audit. This reflects a general trend in global management accounting.
The Sarbanes-Oxley Act recognized by both China and the US offers unified ethical guidelines to standard accounting applications (Table 1).
Cost of compliance to Sarbanes-Oxley rules to control of public companies means that organizations are looking for a global approach to managing MNE finance. This is also reflected in recent theoretical perspectives on accounting and financial controls. The emphasis is on managing accounting amidst organizational restructuring, in the interest of flexible accumulation and changes to national and international policy, suggest lobbying and other stakeholder tactics are driving change. In fact, “many Chinese companies are training their talent, upgrading systems and enhancing the governance structures to tackle these regulations” to ensure that managerial accounting is sufficient in IFRS practice (PriceWaterhouseCoopers, 2011).
Consistent with the ethical framework of Sarbanes-Oxley, the People’s Republic of China (PRC) government introduced revised accounting legislation in 2006. A response to guidelines laid forth by the Ministry of Finance, the International Accounting Standards Board (IASB) and lead Chinese accounting firms. The reform supports further integration of the international trade and capital markets, as well as most IASB standards. Since then, the former Chinese Accounting Standards (CAS) has been mostly replaced by IFRS, meeting up to 95% of the IFRS reporting standards (PriceWaterhouseCoopers, 2011). In 2010, the Chinese Institute of Certified Public Accountants published the new accounting system comprised of Basic Standard, 38, standards and application guidelines (CICPA, 2010).
For investors in China, another set of rules applies dependent upon the status of representative office (RO), a wholly owned foreign enterprise (WOFE or WFOE) or an equity joint venture (EJV) contract. Statutory financial reporting and accounting principles differ accordingly. Currency regulations and intellectual property threats have added to the confusion. Tax payment is the most critical element of the accounting puzzle. China’s tax authorities require foreign investors to submit an audited financial statement along with an annual corporate income tax return (Lamoreaux, 2011). Audit “is required under Chinese or ‘PRC’ GAAP” and attribute to “annual inspection of an RO, WOFE or EJV with foreign ownership” (Lamoreaux, 2011). Un-ethical or illegal conduct such as failure to pay taxes may result in serious penalties up to criminal conviction.
The critique is that accounting diversity may cause detriment to an acquisition firm is largely based on the argument that internal forecasting of costs may be imprecise in estimation of shifts in a national market, subjecting the firm to error induced by rapid fluctuation in capital (Ismail, 2010, and Stewart, 2002). Ethical compromises to investor expectation or even employee compensation may ensue to the point of lost confidence. If production is the key to profitability, then the place to start is definition of an internal system of accounting adequate to meet IFRS rules and regulations to audit (Howard, 2007).
Analysis of Controller Ethics
The use of activity based accounting (ABC) in Chinese businesses illustrates stakeholder theory underway. The application of ABC confirms that Chinese companies, like their US counterparts are targeting cost inside of designated activities so that stakeholder can review audit at the level of detail required to make precise decisions about governance and strategic decision about financial control.
The main objective in ABC accounting is that it can be applied to a number of fiscal control measures in five (5) steps: 1) Expenditure, 2) Resources, 3) Activities, 4) Drivers, and 5) Assignment of Activities. In this manner, causal interpretation of costs, it is suggested, is more effective in strategic decision (Beaujon and Singhal, 1990). Proven as an effective standard of for deployment of MNE multi-level strategies, ABC is the operations side of finance considered in correspondence with market performance; the target of stakeholder investment (Granof et al., 2000).
The recommendation of ABC in ABM as an ethical measure of assurance in Chinese-US global accounting practice is assumed to be a viable solution to internal adherence to IFRS guidelines. Stakeholder theory offers a model for application of the Sarbanes-Oxley Act; as controller functions must adhere to shared accounting principles. Analysis of Sarbanes-Oxley according to five (5) Western ethics traditions illustrates rule elements to those principles (Table 2).
Conclusion
American companies and their corporate leadership have benefitted from the introduction of IFRS rules in China, increasing capacity to make profitable decisions as acquisition companies or new subsidiaries build operations strategies to fit production in that market. Without such consistency in government oversight of corporate financial controls, stakeholders would face critical issues in respect to accountability and financial reporting (Caldwell, 2005). Synchronous with transformations in governance and control in international corporations, the development of a new ethics in business practice in all areas of stakeholder decision in organizations that have “gone global” far exceeds the teleology of agency theory as a viable and adequate theory for discussion of sweeping change.
The retention of some traditional Western rules in China’s accounting environment has alleviated risks that might otherwise pose threat to US companies operating in the country. The question of ethics in governance of MNE is substantially changed where contracts, covenants, control mechanisms and investor incentives are subject to too great a number of risks.
While not always evident in the conceptual framework of stakeholder or “stewardship” theories, the presence of risk is extremely important to the outcome of an organization’s strategic performance in a foreign market. Financial control stands as the singular most important element of any actionable strategy for market launch and growth. Moreover, the future of the CFO as advisor, arbiter and accounting expert in consortium with MNE is certain to increase in obligation as CSR strategies are imposed as publically accountable statements of company brand identity and duty to employees and the communities they voluntarily serve with the assistance of allocations.
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